After an especially difficult year in 2015, recyclers benefited from improving commodity prices and market sentiment in 2016. Although market conditions were less than ideal, last year turned out better than many expected.
By Joe Pickard and Bernie Lee
After the “perfect storm” of events that battered recyclers in 2015 and led to further industry consolidation, market conditions weren’t looking much better at the start of 2016. Weak commodity prices, sluggish domestic economic growth, a strong U.S. dollar, and lackluster overseas scrap demand defined market conditions as last year began. Fortunately, many of those headwinds would dissipate by year’s end, as supply cutbacks helped rebalance commodity markets, supporting prices and providing some relief for recyclers. Although 2016 turned out to be an improvement over 2015, recyclers had to adapt to rapidly changing market dynamics and the ongoing restructuring of the industry.
As in previous years, the health of the scrap industry in 2016 depended on commodity markets, manufacturing output, and global economic growth. Of those three key variables, commodities had the strongest performance last year, although not without some fits and starts. The oil sector provided one of the starkest examples of last year’s commodity market volatility. In contrast with the height of the commodities boom, when oil prices traded well above $100 a barrel, the price of a barrel of West Texas intermediate crude was near $25 by February 2016. The increase in North American energy production, the slowdown in global demand, and the resulting inventory buildup were among the factors that drove prices sharply lower.
The adage that “the cure for low commodity prices is low commodity prices” held true in 2016, however. As oil prices bottomed out, U.S. oil and gas producers cut back on drilling and production. That wasn’t good news for suppliers to the energy industry—including U.S. steelmakers—but the cutbacks eventually helped rebalance the market. Announced oil production cuts from OPEC and Russia later in the year further bolstered market fundamentals. By December 2016, the price of crude oil was over $50 a barrel.
A similar pattern unfolded across other primary and secondary commodity markets last year. In the ferrous scrap market, the U.S. composite price for No. 1 heavy melt languished below $164 a gross ton in January and February—about half the price posted one year earlier. But with scrap prices under pressure, the flow of obsolete scrap slowed to a trickle, putting a floor under the market. By the end of 2016, the composite price for No. 1 heavy melt was back up over $250 a gross ton, according to Scrap Price Bulletin.
The rebound in metal, oil, and other commodity prices contributed to a 25-percent increase in the Dow Jones Commodity Index last year, easily beating the 13.4-percent gain in the stock market despite widespread political uncertainty and stagnant economic growth. Real U.S. GDP grew 1.6 percent in 2016, down from 2.6 percent in 2015, the U.S. Department of Commerce reports. Meanwhile, U.S. manufacturers cut 16,000 jobs last year, according to U.S. Department of Labor data. The sluggish growth wasn’t limited to the United States. Global GDP growth slowed from 3.4 percent in 2015 to 3.1 percent in 2016, while the growth in global trade in goods and services decelerated from 2.7 to 2.2 percent, the International Monetary Fund says. The slowdown in trade was evident in softer overseas demand for scrap, with total U.S. scrap exports in 2016 declining 6 percent by value, to $16.5 billion, the Commerce Department notes.
Given the lackluster global economic performance and slowdown in trade, the broad gains in commodity prices last year were all the more remarkable. Those prices benefited from commodity production cutbacks and extremely accommodative monetary policy conditions. Although market participants expected three hikes in the federal funds interest rate last year, the Federal Reserve elected to raise rates only once. At the same time, central banks in Europe and Japan continued to pump liquidity into those markets.
Commodity markets also got a boost from an unexpected source in 2016: the U.S. election. Campaign promises to ramp up infrastructure spending, lower corporate tax rates, reduce regulatory burdens, and renegotiate trade deals sparked more optimistic business-sector sentiment. Following Donald J. Trump’s election victory in November, commodity prices climbed higher, with copper prices in particular shooting up quickly. As 2016 ended, more than a few recyclers were confident that the new administration’s policy agenda would be good for business, lifting market sentiment heading into 2017. This wrap-up examines how the key commodity markets fared last year, with hints on their direction going forward.
Aluminum market sentiment and pricing improved throughout 2016 thanks in part to expectations for rising aluminum demand and cutbacks in Chinese production. According to Macquarie Research, China’s exports of aluminum semis decreased 7.5 percent in 2016, to less than 3 million mt. At the same time, global aluminum production was little changed at 58.18 million mt, up 0.5 percent from 2015, the International Aluminium Institute says. As a result, the London Metal Exchange official three-month aluminum price increased more than 12 percent in 2016, trading as high as $1,778 a mt (81 cents a pound) in November. U.S. secondary aluminum prices followed primary prices higher even as Chinese demand for U.S. aluminum scrap declined 18 percent last year. The average monthly price for old aluminum sheet increased from 49.74 cents a pound in January to 55 cents by December, American Metal Market reports. As scrap prices advanced last year, domestic recovery of aluminum scrap rose 2 percent, to 3.54 million mt, the U.S. Geological Survey says.
Copper had a lackluster price performance in the first 10 months of 2016, which weighed on copper scrap availability. According to U.S. Geological Survey estimates, the recovery of copper scrap declined 2 percent in 2016, to 810,000 mt: 170,000 mt of old scrap and 640,000 mt of new scrap. Market conditions shifted dramatically, however, following the U.S. election in November. In New York, Comex copper prices rose from $2.25 a pound prior to the election to as high as $2.74 shortly thereafter. Factors behind the rise included expectations for copper-intensive U.S. infrastructure spending and higher domestic manufacturing output as well as positive Chinese manufacturing data. The Caixin China General Manufacturing purchasing managers’ index rose to 51.9 in December, the highest reading since January 2013. As refined copper prices took off late in the year, scrap spreads widened dramatically. The discount on No. 2 copper scrap sold to brass ingotmakers surged to roughly 36 cents a pound in December, double the 18-cent spread in June, according to American Metal Market. Subdued overseas demand for copper scrap may have kept spreads in check for most of last year, as Commerce Department trade data show U.S. copper scrap exports slipped about 1 percent, to 943,000 mt.
Iron and Steel
Trade developments played an increasingly important role in the U.S. iron and steel markets last year, given the growing list of trade cases covering imports of corrosion-resistant steel products, cold-rolled steel, hot-rolled steel, rebar, and cut-to-length steel plate. As a result, total U.S. steel imports declined 15 percent in 2016, to 32.97 million net tons, while imports of finished steel fell 16.7 percent, to 26.25 million net tons, the American Iron and Steel Institute says. As imports declined, U.S. steel producers pushed through a series of price hikes, and ferrous scrap tags rose in kind. The composite U.S. shredded scrap price jumped 37 percent, from $197.17 a gross ton in October to $270.83 in December, according to Scrap Price Bulletin. Pricing on the export front proved to be more erratic, as a strong dollar priced U.S. exporters out of key markets, including Turkey. Although Turkish steel production increased 5.2 percent in 2016, the World Steel Association says, U.S. ferrous scrap exports to Turkey plunged 21 percent, to 3.1 million mt, more than offsetting gains in exports to Mexico, Peru, Kuwait, Bangladesh, Vietnam, and Thailand. Overall, U.S. ferrous scrap exports (excluding stainless steel and alloy steel scrap) decreased 4 percent last year, to 11.2 million mt, Commerce Department trade data indicate.
Nickel and Stainless Steel
Among the major scrap commodity sectors, the nickel-stainless alloy group had the best performance by far in 2016. U.S. stainless scrap exports rose 27 percent by volume last year, to nearly 654,000 mt, while alloy steel scrap and nickel scrap exports increased 40 percent and 9 percent, respectively, according to Commerce Department figures. The gains stemmed largely from improved stainless scrap demand from Canada, Mexico, Pakistan, and Taiwan; better alloy steel scrap demand from China, Kuwait, and Turkey; and improved nickel scrap shipments to Europe. Rising nickel prices last year likely contributed to scrap’s competitiveness. Mine closures and other nickel supply disruptions helped boost the average LME three-month official nickel price 30 percent, from $3.87 a pound in January to $5.02 in December. On the downside, elevated global nickel stocks and declining domestic scrap consumption weighed on market sentiment for much of the year. According to the U.S. Geological Survey, nickel recovered from scrap declined from 101,900 mt (49 percent of consumption) in 2015 to 90,000 mt (43 percent of consumption) in 2016, while domestic production of austenitic stainless steel decreased 17 percent last year.
Lead and Zinc
Zinc was the star performer among the base metals on the LME in 2016, surging to more than $2,900 a mt in November after starting last year below $1,600. Even as zinc prices softened late in the year, the LME official three-month zinc price finished 2016 60 percent higher than in 2015, due in part to a global supply deficit and Chinese smelter production cuts, the International Lead and Zinc Study Group says. One example of such cuts was the Zhuzhou Smelter Group Co., China’s largest zinc smelter, which likely cut its refined zinc production 50,000 mt in 2016, Metal Bulletin reports. As for lead, despite a modest global lead supply surplus, the LME official three-month lead price rose more than 11 percent over the course of 2016. The rising primary lead prices did not have a material impact on domestic lead scrap recovery or U.S. lead scrap exports. The U.S. Geological Survey reports that total old and new lead scrap recovery decreased nearly 5 percent in 2016, to 1.07 million mt, while lead metal scrap exports eased to around 45,000 mt.
Paper and Recovered Fiber
Annual average recovered paper prices rose 28 percent in 2016, while prices from the first quarter to the fourth quarter increased 40 percent. OCC led the price charge, as demand for packaging surged in the fall. U.S. scrap paper exports, meanwhile, rose 0.85 percent, to 21.8 million tons, in 2016. While the spike in demand against a stagnant OCC supply made prices jump, 2016 export volumes increased primarily in generalized export categories, such as scrap from mechanical pulp. Mexico took up a greater share of U.S. scrap paper exports, particularly of high-grade deinking fiber, nearly tripling its consumption of that material. China’s demand for U.S. scrap paper in 2016 remained relatively steady, while Mexico and Canada both substantially increased their consumption of U.S. recovered fiber. On the domestic front, paper and paperboard production declined 0.9 percent last year, to 78.33 million tons, the American Forest & Paper Association says, marking the fifth consecutive decline in overall production. Looking at production by sector, paper production slipped 3.4 percent, to 28.6 million tons, while paperboard production was up 0.7 percent, to 49.7 million tons.
Joe Pickard is chief economist and director of commodities and Bernie Lee is commodities research analyst for ISRI.